Voters' choice: bad policy or deeper debt

FROM SACRAMENTO — Californians will face a dreadful choice next month. They can vote for horrible public policy. Or they can plunge the state deeper into the deficit hole.

If their decision is more red ink, they should be prepared to accept additional painful cuts in government services or yet higher taxes. Or both.

The decision will be about Proposition 1C on the May 19 special election ballot.

Prop. 1C -- the "Lottery Modernization Act" -- is one of six budget-related measures proposed by the Legislature and Gov. Arnold Schwarzenegger. It is by far the measure with the biggest immediate money impact.

It would authorize significant tweaking and expansion of the state lottery, creating more winners. And it also would allow the state to borrow $5 billion immediately against future lottery revenue.

Those should be separate questions: 1) Should the state expand its gambling operation? 2) Should Sacramento take out a loan for, say, 30 years just to help pay one year's worth of daily expenses?

Ordinarily, you might think a bit about growing the lottery. And, ordinarily, you'd probably instantly respond that the borrowing is a really bad idea. But these are hardly ordinary times.

The governor and Legislature, who in February thought they had finally closed a $41-billion hole with a combination of program cuts, tax increases and the lottery borrowing, recently learned that an $8-billion gap has reappeared. Widen it to $13 billion if Prop. 1C is rejected.

That supposed budget fix for the current and next fiscal years also relied on seizing $608 million from early childhood programs and $230 million from mental health care. Those two proposals are on the ballot as Props. 1D and 1E, respectively.

It's all very ugly because it's an ugly time. The recession is mostly to blame. But Sacramento also is at fault for putting off tough decisions about spending and taxes.

Now Schwarzenegger and the Legislature are trying to make them. Prop. 1A would create a spending cap and rainy-day reserve while extending the recently passed tax hikes for up to two years. A blue ribbon commission is studying how to restructure the tax code to make it more reliable and less dependent on the rich.

Meanwhile, Capitol officials are holding their breath awaiting the fate of the $5-billion lottery loan.

The proposal's originator is David Crane, who made a bundle in investments before becoming Schwarzenegger's economic advisor.

He acknowledges that taking out a multiyear loan to make ends meet for merely one year normally would be bad policy. "It's terrible," he says. "But it's better than a tax increase. And it's better than the state cutting back in a recession."

Crane maintains that both tax increases and government spending cuts slow economic recovery. Government programs are "a way of keeping more people employed," he says. "In a recession, you want government to be counter-cyclical -- the teeter-totter" to a falling private sector.

"The overriding principle is that, at a minimum, you want government to be retaining the same level of expenditures, if not expanding."

Crane points to President Obama's economic stimulus package, which is heavy on new spending.

Of course, the feds can run up huge deficits and print money. States can't. And many California conservatives would rather see state government go belly-up than pay higher taxes.

Part of the distasteful remedy may be the lottery borrowing. Only don't call it "borrowing" in front of Crane. It's "securitization," he insists. Future lottery revenue would "securitize" the state's repayment of $5 billion in bonds.

This is a semantics game with political consequences. When the "borrow" word is used to describe the lottery proposal, I'm told, voter support for it drops by 25 percentage points.

Indeed, Prop. 1C was the least popular of the six ballot measures in a recent poll by the Public Policy Institute of California. It was supported by only 37% of likely voters; 50% were opposed.

You could also call it a payday loan. That's how far Sacramento has fallen.

This is probably the easiest $5 billion the state can pocket, even if it would have to pay back double, including interest.

The lottery was sold to voters in 1984 as a savior for education. But lottery funds account for less than 2% -- roughly $1 billion this year -- of state and local money spent on K-12 schools.

Under Prop. 1C, the lottery's responsibility for helping to support schools would shift to the debt-ridden state general fund. And that worries Sen. Bob Huff (R-Diamond Bar), who signed the argument against 1C in the Voter Information Guide. "It puts more strain on the general fund," he says.

Taylor expresses the same concern.

But there isn't likely to be any money raised to oppose 1C.

Rich Indian casinos don't fear competition from a beefed-up lottery. "We don't see any problems with this," says Alison Harvey, executive director of the California Tribal Business Alliance.

That's not true, however, of the low-budget California Coalition Against Gambling Expansion.